TOPIC: END OF THE DIET MOCK

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FINANCIAL REPORTING TOPIC: END OF THE DIET MOCK Kindly go through the video lecture on financial reporting before you attempt the questions because the topic have been simplified and analyzed for

1 FINANCIAL REPORTING TOPIC: END OF THE DIET MOCK Kindly go through the video lecture on financial reporting before you attempt the questions because the topic have been simplified and analyzed for easy understanding. QUESTION 1 On 1 May 20X7, War Co acquired 70% of the ordinary share capital of Peace Co by issuing to Peace Co's shareholders 500,000 ordinary $1 shares at a market value of $1.60c per share. The costs associated with the share issue were $50,000. As at 30 June 20X7, the following financial statements for War Co and Peace Co were available. INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 20X7 War Co Peace Co $'000 $'000 Revenue 3,150 1,770 Cost of sales (1,610) (1,065) Gross profit 1, Distribution costs (620) (105) Administrative expenses (325)* (210) Interest payable (70) (30) STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 1

2 Dividends from Peace Co 42 Profit before taxation Income tax expense (283) (135) Profit for the year *Note. The issue costs of $50,000 on the issue of ordinary share capital are included in this figure. Dividends paid during the year were: War Co: $38,00, Peace Co: $60,000 STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 20X7 War Co Peace Co $'000 $'000 Assets Non-current assets Property, plant and equipment 1, Investment in Peace Co 800 2, Current assets Inventory Receivables Cash Total assets 3,125 1,125 STARRY GOLD ACADEMY , , Page 2

3 Equity and liabilities Shares of $1 each Share premium Retained earnings , Non-current liabilities 1, Current liabilities Total equity and liabilities 3,125 1,125 You have been asked to prepare the consolidated financial statements, taking account of the following further information. (a) There was no impairment in the value of goodwill. (b) War Co accounts for pre-acquisition dividends by treating them as a deduction from the cost of the investment. Peace Co paid an ordinary dividend of 60c per share on 1 June 20X7. No dividends were proposed as at 30 June 20X7. (c) The profit of Peace Co may be assumed to accrue evenly over the year. (d) The property, plant and equipment of Peace Co had a net realisable value of $400,000 at the date of acquisition. Their fair value was $500,000. It has been decided that, as Peace Co was acquired so close to the year end, no depreciation adjustment will be made in the group accounts; the year end value will be taken as the carrying value of the property, plant and equipment in the accounts of Peace Co. The remaining assets and liabilities of Peace Co were all stated at their fair value as at 1 May 20X7. (e) Peace Co did not issue any shares between the date of acquisition and the year end. (f) There were no intercompany transactions during the year. Required STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 3

4 Prepare the consolidated statement of financial position and the consolidated income statement of the War Group Co for the year ended 30 June 20X7. It is the group policy to value the non controlling interest at full fair value. The goodwill attributable to the noncontrolling interest at acquisition is valued at $12,000. QUESTION 2 The following list of account balances has been prepared by Polymer Co, plastics manufacturers, on 31 May 20X8, which is the end of the company's accounting period: $ $ Authorised and issued 300,000 ordinary shares of $1 each, fully paid 300, , % cumulative preference shares of $1 each, fully paid 100,000 Revaluation surplus 50,000 Share premium reserve 100,000 General reserve 50,000 Retained earnings 31 May 20X7 283,500 Patents and trademarks 215,500 Freehold land at cost 250,000 Leasehold property at cost 75,000 Amortisation of leasehold property 31 May 20X7 15,000 Factory plant and equipment at cost 150,000 Accumulated depreciation plant and equipment 31 May 20X7 68,500 Furniture and fixtures at cost 50,000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 4

5 Accumulated depreciation furniture and fixtures 31 May 20X7 15,750 Motor vehicles at cost 75,000 Accumulated depreciation motor vehicles 31 May 20X7 25,000 10% loan notes (20Y0 20Y5) 100,000 Trade receivables/ trade payables 177,630 97,500 Bank overdraft 51,250 Inventories raw materials at cost 31 May 20X7 108,400 Purchases raw materials 750,600 Carriage inwards raw materials 10,500 Manufacturing wages 250,000 Manufacturing overheads 125,000 Cash 5,120 Work in progress 31 May 20X7 32,750 Sales 1,526,750 Administrative expenses 158,100 Selling and distribution expenses 116,800 Legal and professional expenses 54,100 Allowance for receivables 31 May 20X8 5,750 Inventories finished goods 31 May 20X7 184,500 2,789,000 2,789,000 Additional information: (a) Inventories at 31 May 20X8 were: STARRY GOLD ACADEMY , , Page 5

6 $ Raw materials 112,600 Finished goods 275,350 Work in progress 37,800 (b) Depreciation for the year is to be charged as follows: Plant and equipment 8% on cost charged to production Furniture and fixtures 10% on cost charged to admin Motor vehicles 20% on reducing value 25% admin 75% selling and distribution (c) Financial, legal and professional expenses include: $ Solicitors' fees for purchase of freehold land during year 5,000 (d) Provision is to be made for a full year's interest on the loan notes. (e) Income tax on the profits for the year is estimated at $40,000 and is due for payment on 28 February 20X9. (f) The directors recommended on 30 June that a dividend of 3.5c per share be paid on the ordinary share capital. No ordinary dividend was paid during the year ended 31 May 20X7. (g) The leasehold land and buildings are held on a 50 year lease, acquired ten years ago. Required From the information given above, prepare the income statement of Polymer Co for the year to 31 May 20X8 and a statement of financial position at that date for publication in accordance with International Financial Reporting Standards. Notes to the financial statements are not required. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 6

7 QUESTION 3 Reprise purchased 75% of shares in Encore 10 years ago when the balance on its retained earnings reserve was 1,044,000. The statements of financial position of the two companies as at 31 st march 2004 are as follows. Reprise Encore Non current assets Investment in Encore 2,000 Land and building 3,350 Plant and equipment 1,010 2,210 Motor vehicles ,870 2,555 Current assets Inventories Trade receivab 1, Cash and bank ,221 3,472 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 7

8 Equity Ordinary share 1, Revaluation reserves 2,500 Retained earnings 4,225 2,610 7,725 3,110 Non current liabilities 10% debenture 500 Current liabilities. Trade payable ,221 3,472 The following additional information is available a. Included in trade receivables of Reprise are amounts owed by Encore of 75,000. b. Included in the inventories of Encore are items from Reprise during the year for 31,200. Reprise marks up its goods by 30% to achieve its selling price. c. The non controlling interest is measured at fair value using the share price of Encore at the acquisition date. The market price of a share at Encore at acquisition was STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 8

9 d. Goodwill has been impaired by 421,000. You are required to prepare consolidated statement of financial position for the Reprise group of companies as at 31 st March QUESTION 4 a. X Plc is in the forestry business. It cuts wood and seasons it for 3 to 4 years before selling it to furniture manufacturers. X Plc sells 1,000 tonnes of wood to a bank for 10,000 per tonne (which is below cost). X Plc has a contract under which it will buy the wood back from the bank in two years time for 10,000,000 plus interest. The wood will never leave X Plc s premises. When should X Plc recognise the revenue from this transaction? b. A firm of accountants pay a tuition provider in advance to provide training for 10 trainees over a 3 year period. The fee is structured at 1,000 per day. The advance payment is non-refundable if any of the trainees leave the accountant s employment When should the tuition provider recognise the fee? c. Juicy Kebab of Lamb (JKL) is a successful food retailing business. It has expanded greatly by offering people the opportunity to open JKL outlets across Nigeria and in other countries. Any person setting up a franchise must pay JKL an initial fee of 2,000,000 and a quarterly fee of 15% of gross revenue. The initial fee covers: 1. Training ( 100,000) STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 9

10 2. Supply and installation of assets (cookers, shop fittings, signage, etc. 500,000); 3. Management assistance over first year of the business ( 10,000 per month); 4. Advertising costs (covering local advertising for the launch of the business ( 200,000) and a contribution to JKL national advertising over the first two years of the business ( 45,000 per month). Discuss how the above will be recognized in accordance with IAS 18 QUESTION 5 A. What are the conditions for classifying an asset as held for sales in accordance with IFRS 5 B. A company has purchased a large item of plant. The following costs were incurred. List price of the machine 1,000,000 Trade discount given 50,000 Delivery cost 100,000 Installation cost 125,000 Cost of site preparation 200,000 Architect s fees 15,000 Administration expense 150,000 Test run cost 75,000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 10

11 The test run cost was to ensure that the asset was installed and working correctly. Items of inventory were produced during the test run. These had a sale value of 10,000. Local government officials have granted the company a license to operate the asset on condition that the company will remove the asset and return the site to its former condition at the end of the asset s life. The company has recognised a liability of 250,000 in respect of the expected clearance cost. You are require to determine the cost of the PPE in accordance with IAS 16 c. On 1 January Year 1 Entity P purchased a building for its investment potential. The building cost 1 million with transaction costs of 10,000. The depreciable amount of the building component of the property at this date was 300,000. The property has a useful life of 50 years. At the end of Year 1 the property s fair value had risen to 1.3 million. You are required to determine the carrying amount of the PPE at the end of the year 1 using a. Cost model b. Fair value model QUESTION 6 i. Define the following terms A. Financial instruments B. Financial assets C. Financial liabilities STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 11

12 ii. List five(5) examples of financial instruments. iii. State and explain the category of financial instruments according to IAS 39 iv. A company issued a convertible bond for 2,000,000 on 1 January 20X5. The bond is to be redeemed on 31 December 20X7 (3 years after issue). The bond holders can take cash or shares with a nominal value of 1,200,000 on this date. The bond pays interest at 5% but the market rate of interest for similar risk bonds without the conversion feature was 9% at the date of issue. a) Calculate the liability and equity components of the bond on initial recognition. b) Construct the necessary journal on initial recognition. c) Construct an amortisation table to show how the liability component would be measured over the life of the bond. d) Construct the journal to reflect the possible conversion of the bonds to shares on 31 December 20X7. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 12

13 QUESTION 7 A. In accordance with IAS 23: Borrowing Costs that are directly attributable to the acquisition, construction or production of a qualifying asset forms part of the cost of that asset while other borrowing costs are recognised as an expense. You are required to: State the conditions wherein capitalisation of borrowing costs: A. Commences B. Should not be suspended C. Should cease B. VITA MAX Pic is constructing a factory that will lake about 18 months to complete. The company commenced construction on January 2, The following payments were made during the years January 40, March 90,000 June 20,000 31October 40, November 50,000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 13

14 The first payment on 31 January was funded from the company's pool of debt However, the company succeeded the raising Medium Term Loan Notes for an amount of 160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in areas. These funds were specifically used for the construction. Excess funds were temporary invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a 40,000,000 payment which could not be funded from the Medium Term Notes. The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out. The following amounts of debts were outstanding at the statement of financial position date of 31 December, Medium Term Loan Notes 160,000 Bank overdraft 240,000 10% 7-year Notes 1 October, 2018 with simple interest 1,800,000 payable 31 December For the bank overdraft the weighted average amount outstanding during the year was 150,000,000 and the total interest charged by the bank amounted to 6,760,000 for the year. Required: Calculate the total amount of interest to be capitalised. Note: All working should be to the nearest thousand naira. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 14

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STRATEGIC FINANCIAL MANAGEMENT WEEK 10 QUESTIONS TOPIC: BUSINESS VALUATION,MERGER AND ACQUISITION

STRATEGIC FINANCIAL MANAGEMENT WEEK 10 QUESTIONS TOPIC: BUSINESS VALUATION,MERGER AND ACQUISITION Kindly go through chapter 7 in the video lecture before you attempt the questions because the topic have